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While commercial property insurance policies generally provide coverage for physical damage and business interruption losses arising from civil unrest, COVID-19 losses will complicate the claims process for some businesses, legal experts say.
As curfew orders are lifted, policyholders should also be aware of waiting periods, time limits and other policy details that may affect their ability to get claims paid, they say.
Largely peaceful protests continue amid growing calls for police reform following the May 25 death in police custody of George Floyd in Minneapolis. A funeral service for Mr. Floyd was held in Houston Tuesday.
Possible hurdles to insurance coverage that some policyholders may face were underscored in an Illinois Department of Insurance bulletin issued to insurers Monday.
The bulletin asked insurers to “err on the side of the policyholder when paying claims as a result of riots, civil commotion, or vandalism” from businesses that have been unable to pay their premiums in full since an executive order from Illinois Gov. J.B. Pritzker took effect March 20. The order required all Illinois residents to stay at home and nonessential businesses to cease.
To the extent business interruption provisions are included under a policy, insurers should also base payouts on business activity levels that “eliminate the impact of COVID-19,” the Illinois Department of Insurance said.
The bulletin called on insurers to expedite claims, advance claim payments and treat all policyholders fairly, regardless of size.
Many small-business owners have standard forms of commercial property insurance that should pay for physical losses for vandalism or theft, and these claims will not be “controversial,” said Kirk Pasich, Los Angeles-based managing partner at Pasich LLP.
Business interruption losses, however, may be less straightforward, he said.
“The issue for a lot of businesses … is going to be this interplay between their losses from the pandemic and their losses from curfews,” Mr. Pasich said.
In Los Angeles, where curfews lasted five nights, it was right at the same time the government was letting restaurants and small businesses reopen, so this was an “extra challenge” for them, Mr. Pasich said.
For policyholders for whom COVID-19 was their first significant claim or their first property claim, it may not have been clear that business income losses from the civil unrest should be treated as a separate claim, said Tamara D. Bruno, partner, Pillsbury Winthrop Shaw Pittman LLP, based in Houston.
“It’s a different trigger, a different triggering event. The curfew orders are distinct from the COVID-19 shutdown orders, but there will end up being overlap, particularly when it comes to damages,” Ms. Bruno said.
The biggest issue will be how to value business interruption claims arising from the civil unrest in the wake of COVID-19, legal experts said.
“Say a business was partially shut down or completely shut down because of COVID-19, and maybe they were reopening, or there was a staggered reopening, and suddenly a protest happened, and they had to shut down again. How does the insurer value that?” said Kim Winter, a policyholder attorney at Lathrop GPM LLP in Kansas City, Missouri.
“Are they going to say, ‘Well, you were mostly closed because of COVID-19, and you really didn’t have much business anyway, so, yes, there’s coverage but not very much,” Ms. Winter said.
Anthony Miscioscia, Philadelphia-based partner at White and Williams LLP said: “The argument that I could see being raised and disputed by both sides is how do you quantify the business interruption where you have a business that was closed and, therefore, either doing no business or doing a fraction of the business it was doing pre-COVID-19.”
The question then is what is the damage model that you use, he said.
“Do you look at what would have been their standard loss of business for the month of June, or do you compare it to what happened immediately before the rioting? I expect insurers to argue the latter, that the insured’s loss wasn’t 100% of the normal June and that one must instead look at what business the insured was doing immediately prior to the loss and, then, perhaps have some adjustment for business that typically would increase in June more so than March or April,” Mr. Miscioscia said.
While property insurance policies vary, typically there is business interruption coverage for civil authority orders such as curfews that require businesses to close.
However, there are waiting periods, and time and distance limits that may apply in order for coverage to be triggered that policyholders should be aware of, legal experts say.
“These are not cookie-cutter policies, so you really have to check the language,” Ms. Winter said.
While some waiting periods are brief, others are longer, and some are “way more than you would need for this type of loss, so this is something policyholders should check,” she said.
Depending on the policy, waiting periods can vary from 12 hours to 72 hours and some of them say “continuous period,” Ms. Bruno said.
“If you have a policy that has, say, a 24-hour continuous waiting period for civil authority coverage then that is one of your first hurdles even if you are being shut down by these curfew orders, because unlike COVID-19 these are partial day orders,” she said.
Geographic distance requirements may also apply that limit coverage to a specified area within which property damage must occur, experts say.
This requirement may say “you get coverage if you’re closed due to civil authority order because of damage that occurs within one mile, five miles, 10 miles or even as large as 25 miles of your location,” Ms. Bruno said.
This can present a hurdle to policyholders if the actual damage occurs in a neighborhood across the city from their premises, she said.
Even if your business is located outside the limit of civil authority based upon your policy language, there could be coverage under a so-called “leader property or loss of attraction business interruption coverage,” Ms. Winter said.
This would cover you if say “you are near a big attraction that is within the limits and they get closed, and you rely on their overflow of business to feed your own business,” she said.
“It’s not in every policy, but it’s something to check for,” Ms. Winter said.
Because of the time traps in policies, businesses small or large should give notice of claim and reach out to their agent or broker, Mr. Pasich said.
“Give notice, even if it turns out you don’t need it. There’s no downside. The best thing that happens is the insurer steps up and helps you,” he said.
Mr. Pasich predicts coverage litigation may follow, just as it did following the civil unrest in Los Angeles that occurred after the Rodney King trial verdict in 1992.
“Here it’s more complicated because of the impact of COVID-19 and the various orders restricting what you can do. … A lot of people believe because of so many protesters on the streets we’re going to see another wave of COVID-19, and that will just complicate the question about what the cost of the loss is here,” he said.
Data analytics firm Verisk Analytics Inc’s unit Property Claim Services Inc. has declared property damage from riots in more than 20 states across the U.S. a catastrophe, meaning at least $25 million in insured losses.
This is the first riot and civil disorder event to include more than one state and the first event designated by PCS since the Baltimore riots of 2015.
The Los Angeles riots of 1992 rank as the costliest civil disorder, with an insured loss of $775 million at the time, or $1.4 billion in 2020 dollars, according to PCS.